As a small business owner, there are few things more frustrating than bagging a big project, putting in late nights and long hours, then waiting for what seems like an eternity to get paid.
In my experience, corporate America’s excuses typically fall into three buckets:
1. We never got your invoice.
2. Your invoice didn’t have a purchase order number on it (probably because we didn’t tell you that you had to have one).
3. Our controller is on vacation, maternity leave or in Antarctica.
Even when times were good and big companies were flush, collecting bills from large customers could be difficult. But now that we’re in a recession, these corporations aren’t even bothering to make excuses for their slow-as-molasses payment practices. Now, 120-day payments have become a fact of life.
According to a recent article in The Wall Street Journal, companies with more than $5 billion in annual revenue took an average of 55.8 days to pay suppliers and trade creditors in the second quarter, up 5 percent from 53.2 days a year earlier. According to REL Consultancy, the firm that conducted the analysis, big companies also collected their bills faster, shaving the average collection time to 41 days versus 41.9 days a year earlier.
Businesses with less than $500 million in sales, by contrast, took only 40.1 days to pay their vendors, down 6.5 percent from 42.9 days, REL found. But it took them roughly 8 percent longer to collect their payments–an average of 58.9 days vs. 54.4 days a year earlier.
And that really burns me. Because, while General Electric reportedly freed up $3.8 billion in cash last quarter by shortening collection times, collecting past-due accounts and stretching out payments to suppliers, thousands of small businesses have gone under because they couldn’t get credit lines or any kind of financing at all.
What’s the solution? Well, despite the conventional wisdom about offering prepayment discounts, I can tell you from experience that this rarely works with corporate America. And unlike consumers and small businesses, big companies prefer to pay by check–so you can forget about asking GE to hand over its AmEx card. Factoring (selling your receivables at a discount to a financing company) can take a big bite out of your profits if you have to wait months to get paid and your margins are slim to begin with.
That’s why many small and medium-size businesses are turning to online B2B exchanges to help them close the cash flow gap. One of the most visible players in the market is The Receivables Exchange, an online auction marketplace that allows qualified sellers (suppliers) to sell their receivables to the highest bidder. Rather than wait for payment, suppliers can sell their receivables at a modest discount and receive 80 percent to 85 percent of the funds within three days. Sellers are required to have at least two years of operating history, be registered to do business in the United States and have generated a minimum of $1.5 million over the previous 12 months.
Here’s another idea: Don’t let any single customer–no matter how large or potentially lucrative–account for more than 10 percent of your company’s sales. And diversify your business with short-term projects for smaller companies and high-net-worth individuals who are likely to pay you promptly without a lot of red tape.
This entry was posted on Tuesday, September 8th, 2009 at 9:40 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.One Response to “Making Corporate America Pay (on Time)”
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September 12th, 2009 at 2:10 pm
Rosalind,
Yes, getting paid by customers can and is a bone of contention for small business owners. It can be an administrative nightmare to get the customer to pay. Phone call after phone call, email after email until FINALLY your money is sent.
I have started to charge my clients an interest rate for every day they are late with a payment. Typically by the time the invoice gets to the controller (from my customer contact), the controller is upset that his/her company has missed a deadline and had to pay more.
Thanks for the post. I appreciate the information.
Rebecca Ryckman